Capital Market Assumptions

HSBC Asset Management argues that strategic portfolios should rotate away from concentrated US exposures and diversify across international markets, higher-quality fixed income, emerging markets and alternative diversifiers in a higher-for-longer regime.

• The report’s 10-year assumptions start from interest-rate estimates and add asset-class risk premia based on economic conditions, valuations and future fundamentals rather than historical returns.
• The central macro regime is “shock and a boom”: high government deficits, roughly USD 1 trillion of planned US hyperscaler capex and geopolitical fragmentation are expected to keep inflation more volatile and rates higher than in the 2010s.
• US equities have an estimated 3.45% equity risk premium and represent two-thirds of the global market-cap benchmark, while emerging markets account for about 45% of global GDP but only a market-cap weight in the low teens.
• Emerging-market benchmarks offer different exposures: the five largest economies represent 63% of EM output, versus 85% of EM equities, just under half of local-currency bonds and 22% of hard-currency bonds.
• Local EM bonds appear structurally strongest because domestic banks, pension funds and insurers have gained importance, foreign ownership has declined, and EM fixed income has reacted less negatively to global equity drawdowns since mid-2024.

Takeaway: Investors should favour selective exposure to international and emerging markets, especially local EM bonds and pockets of real-yield value such as Brazil, Colombia and Mexico, while using short-duration quality credit, liquid alternatives, commodities and active FX to diversify weaker stock-bond hedging; broad EM beta and indiscriminate US exposure are not recommended.